17-06-2024 12:02

EU Renovation Wave: Impact on Nordic real estate companies

The EU Renovation directive will require a monumental renovation effort in Europe. Nordea's ESG Research team takes a look at the potential impact on Nordic real estate companies.
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After years in the making, the EU Energy Performance of Buildings Directive (EPBD) has become law after its adoption by a majority of the EU Parliament in March. Although watered down from the original proposal, the law is set to usher in a major renovation wave across Europe, according to Marco Kisic, Head of ESG Research at Nordea.

For a recent report, Kisic’s team set out to assess the impact of the law on the real estate companies covered by Equities Research at Nordea. The team sifted through 6,400 buildings’ energy certificates and two national buildings databases to figure out which buildings would fall in the renovation mandate’s crosshairs. The result was less concerning than originally feared, according to Kisic. 

“We think the impact will be manageable for the companies we cover, but it will create a monumental renovation effort in Europe,” he says. 

A risk for financially-stretched companies

Kisic notes that the EPBD is likely to create a sector overhang by adding uncertainty around final renovation requirements, supply-chain bottlenecks and downward pressure on the valuation of bottom-rated buildings.

“The regulation could be a direct risk for financially-stretched companies,” he says.


The regulation could be a direct risk for financially-stretched companies.

Marco Kisic, Head of ESG Research, Nordea Equities

Buildings are the single largest energy consumer in Europe, making the sector crucial to achieving the EU’s energy and climate goals. With the EPBD, the EU aims to achieve a fully decarbonised building stock by 2050. 

Under the law, countries have until 2030 to renovate 16% of their commercial building stocks and until 2033 to renovate 26% of those stocks. They have until 2035 to improve the energy efficiency of their residential stocks by 20-22%. At today’s renovation rates, that would take around 25 years, according to Kisic. Countries now have two years to define how the targets will be achieved. 

Existing buildingsTarget yearRequirement
Non-residential building2030Renovate the 16% worst-performing buildings
2033Renovate the 26% worst-performing buildings
Residential building2030The average primary energy use of all residential buildings decrease by at least 16% by 2030
2035Primary energy use should decrease by 20-22% by 2035
55% of the energy reduction must be achieved through renovation of the worst-performing buildings
All buildings2050National building stocks should be transformed into zero-emission buildings
New buildingsTarget yearRequirement
 2028All new public buildings must be zero-emission buildings
2030All new buildings must have zero on-site emissions from fossil fuels

Net benefit to owners

Kisic notes that the companies that will be most affected are those with the least energy-efficient portfolios. Based on his team’s review, he estimates that 25% of companies’ portfolios will require renovation – an annual renovation rate of 2.1% versus today’s 1%. 

“This will erode companies’ free cash flows and place the valuations of buildings above the renovation threshold under pressure,” he says.

Ultimately, the EPBD should deliver a net benefit to owners in the form of lower energy bills and potentially higher valuations. Kisic estimates that the energy savings derived from the renovations could reduce the companies’ energy bills by around 14% on average during the period, with a return of investment of around 6%. 

He notes that, while these benefits do not always accrue directly to the owners, they could be especially beneficial for companies with high energy-consuming portfolios and relatively straightforward renovations to execute.

Find out what the EU renovation wave is likely to mean for renovation companies and the businesses providing the solutions

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